U.S. Chemist Is Charged With Insider Stock Trades

DIANA B. HENRIQUES

Wednesday

Mar 30, 2011 at 4:21 AM

The chemist, Cheng Yi Liang, and his son are accused of using confidential agency data about pending drug approvals to make profitable trades.

A 15-year veteran of the federal Food and Drug Administration and his 25-year-old son were arrested on Tuesday and charged with systematically using confidential information about pending drug applications to reap millions in illegal trading profits since 2007.

The charges were made in a criminal complaint filed by the Justice Department against Cheng Yi Liang, 57, and his son, Andrew Liang, both residents of Gaithersburg, Md. The Securities and Exchange Commission simultaneously filed a civil securities fraud complaint against the elder Mr. Liang.

Timothy Sullivan, a lawyer for Andrew Liang, declined to comment on the charges. Andrew Carter, a federal public defender temporarily assigned to represent Cheng Yi Liang, did not respond to calls seeking comment.

The cases, filed in Federal District Court in Greenbelt, Md., cited trades in the stock of five pharmaceutical companies whose products were undergoing review at the F.D.A.’s Office of New Drug Quality Assessment, where the elder Mr. Liang worked as a chemist. His job gave him access to a password-protected database that tracked the status of new drugs under review.

The criminal complaint accused him of using that database to get an early look at F.D.A. decisions on companies developing drugs and then working with his son to trade on that knowledge, buying stock ahead of good news and selling it before bad news was announced.

The complaints assert that the defendants made just under $2.3 million in direct profits and avoided an additional $1.3 million in losses.

In a statement announcing the case, Lanny A. Breuer, the assistant attorney general for the criminal division, said: “Cheng Yi Liang was entrusted with privileged information to perform his job of ensuring the health and safety of his fellow citizens. According to the complaint, he and his son repeatedly violated that trust to line their own pockets.”

Law enforcement veterans said the case was unusual on several fronts. First, it is uncommon for insider-trading investigations to involve the F.D.A., despite the significant amount of market-moving information that passes through the agency each year. The agency maintains a rigorous ethics code and imposes significant restrictions on stock ownership and trading by its employees.

The case is also noteworthy, Mr. Breuer said, for its application of computer technology. Investigators used hidden software installed on Mr. Liang’s computer to track his visits to the confidential database and match those visits against his trading activity in accounts he had set up in the names of friends and relatives in Maryland, China and Japan.

It is not clear from the complaint what drew the attention of law enforcement, but clearly, something in January prompted investigators to install tracking software on Mr. Liang’s computer.

According to the complaint, the hidden software revealed that Mr. Liang had tapped into the database on Jan. 18 and reviewed an internal F.D.A. document recommending approval of Viibryd, an antidepressant drug submitted to the agency by Clinical Data.

The complaint asserted that, within minutes, several accounts controlled by Mr. Liang and his son had bought 4,875 shares of Clinical Data’s stock. According to prosecutors, the Liangs accumulated 48,875 shares of Clinical Data stock before Viibryd’s approval was announced on Jan. 21, and subsequently sold their entire stake for a profit of more than $379,000.

The complaint also accuses the Liangs of trading in advance of a May 6, 2009, announcement by Vanda Pharmaceuticals that the F.D.A. had approved its drug Fanapt. Using Andrew Liang’s account and several other accounts, the Liangs are accused of netting more than $1 million, for a profit of nearly 800 percent.

The other companies whose stock was affected by the trading were Progenics Pharmaceuticals, Middlebrook Pharmaceuticals and Momenta Pharmaceuticals.

The S.E.C. complaint accused the elder Mr. Liang of illegally trading ahead of more than two dozen F.D.A. announcements involving drug applications by 19 companies. It seeks to recover profits from him, from his son and from five other defendants, including Mr. Liang’s wife and mother.

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